Market failure in US Health Care

U.S. health care expenditures rose 6.7% in 2006, the government recently reported. According to the Centers for Medicare and Medicaid Services, total health care expenditures exceeded $2.1 trillion, or more than $7,000 for every American man, woman, and child. Medicare costs jumped a record 18.7%, driven by the new privatized drug benefit. Total health care spending, now amounting to 16% of the gross domestic product, is projected to reach 20% in just 7 years.

Relentless medical inflation has been attributed to many factors — the aging population, the proliferation of new technologies, poor diet and lack of exercise, the tendency of supply (physicians, hospitals, tests, pharmaceuticals, medical devices, and novel treatments) to generate its own demand, excessive litigation and defensive medicine, and tax-favored insurance coverage.

Here is a second opinion. Changing demographics and medical technology pose a cost challenge for every nation’s system, but ours is the outlier. The extreme failure of the United States to contain medical costs results primarily from our unique, pervasive commercialization. The dominance of for-profit insurance and pharmaceutical companies, a new wave of investor-owned specialty hospitals, and profit-maximizing behavior even by nonprofit players raise costs and distort resource allocation. Profits, billing, marketing, and the gratuitous costs of private bureaucracies siphon off $400 billion to $500 billion of the $2.1 trillion spent, but the more serious and less appreciated syndrome is the set of perverse incentives produced by commercial dominance of the system.

Our author is correct: the US is an outlier when it comes to the cost of care:

Although the problem is – necessarily – more complex than that. Having higher expenditures on health is not surprising. The US also has more bloody money – I’m sure their expenditures on everything from vehicles to fancy soap. The key is, does the US get better health outcomes for that money? No, no it doesn’t.

This is the market failure – the US system is structured in a cost-inflating manner. Cost containment is just not adequately instituted.

The private insurance system’s main techniques for holding down costs are practicing risk selection, limiting the services covered, constraining payments to providers, and shifting costs to patients. But given the system’s fragmentation and perverse incentives, much cost-effective care is squeezed out, resources are increasingly allocated in response to profit opportunities rather than medical need, many attainable efficiencies are not achieved, unnecessary medical care is provided for profit, administrative expenses are high, and enormous sums are squandered in efforts to game the system. The result is a blend of overtreatment and undertreatment — and escalating costs. Researchers calculate that between one fifth and one third of medical outlays do nothing to improve health.

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Many U.S. insurers do reward physicians for following standard clinical practices, but these incentives do not aggregate to an efficient national system of care. After more than three decades of managed care — and the same three decades of studies by Wennberg and colleagues identifying wide variations in practice patterns — consistent practices are still far from the norm. Commercial incentives are not fixing what’s broken.

Instead, cost-containment efforts have fallen heavily on primary care physicians, who have seen caseloads increase and net earnings stagnate or decline. A popular strategy among cost-containment consultants relies on the psychology of income targeting. The idea is that physicians have a mental picture of expected earnings — an income target. If the insurance plan squeezes their income by reducing payments per visit, doctors compensate by increasing their caseload and spending less time with each patient.

This is among the reasons why nationalised/socialised/universal (call it what you will) Health Care/Insurance makes so much sense: only a government is big enough to achieve national agency on behalf of consumers of health care. The problem, then, isn’t market failure per se – it’s that we have a tonne of markets, haphazardly stitched together nation-wide, when what is required is a national market. Whether a national market with monopsony purchasing power or not is another issue.

Here’s a third opinion. Back up in the figure/tables, the Rest of the World is getting equivalent or better health outcomes, for far less money. How are they able to keep their technology costs so low, relative to the US? Because the US spends all the money on technological change. The rest of the world can keep its costs down by relying upon the US system to reward new technologies, which we then use. In effect, US patients are subsidising patients in pretty much every other country on earth.

I’m not suggesting this is either “right” or “wrong”, nor am I suggesting that this phenomenon somehow makes the US structure for cost-containment “good” – because it certainly is not, nor is it efficient, nor is it in any way contributing positively to US patient safety. It’s a perspective to bear in mind, though. Every/anytime you suffer a non-American giving you shit about the expense of health care in the US, remind them that it is thanks to that expense that they can enjoy less-costly care.

Just remember that your system is still wildly inefficient and overly costly, though, and that you’re being thoroughly ripped off with respect to your health outcomes.

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1 comment so far

I’m not about to get into an argument about the U.S. contribution to medicine : though tummy tucks may be of limited benefit to humanity. I will suggest that industry gets a free ride on publicly funded research in most cases.